02414cam a22002777 4500001000700000003000500007005001700012008004100029100003000070245013300100260006600233490004200299500001400341520114500355530006101500538007201561538003601633690008801669690007501757690009001832700002001922710004201942830007701984856003802061856003702099w15003NBER20150303154118.0150303s2009 mau||||fs|||| 000 0 eng d1 aAngeletos, George-Marios.10aIncomplete Information, Higher-Order Beliefs and Price Inertiah[electronic resource] /cGeorge-Marios Angeletos, Jennifer La'O. aCambridge, Mass.bNational Bureau of Economic Researchc2009.1 aNBER working paper seriesvno. w15003 aMay 2009.3 aThis paper investigates who incomplete information impacts the response of prices to nominal shocks. Our baseline model is a variant of the Calvo model in which firms observe the underlying nominal shocks with noise. In this model, the response of prices is pinned down by three parameters: the precision of available information about the nominal shock; the frequency of price adjustment; and the degree of strategic complementarity in pricing decisions. This result synthesizes the broader lessons of the pertinent literature. We next highlight that his synthesis provides only a partial view of the role or incomplete information. In general, the precision of information does not pin down the response of higher-order beliefs. Therefore, once cannot quantify the degree of price inertia without additional information about the dynamics of higher-order beliefs, or the agents' forecasts of inflation. We highlight the distinct role of higher-order beliefs with three extensions of our baseline model, all of which break the tight connection between the precision of information and higher-order beliefs featured in previous work. aHardcopy version available to institutional subscribers. aSystem requirements: Adobe [Acrobat] Reader required for PDF files. aMode of access: World Wide Web. 7aD8 - Information, Knowledge, and Uncertainty2Journal of Economic Literature class. 7aE1 - General Aggregative Models2Journal of Economic Literature class. 7aE3 - Prices, Business Fluctuations, and Cycles2Journal of Economic Literature class.1 aLa'O, Jennifer.2 aNational Bureau of Economic Research. 0aWorking Paper Series (National Bureau of Economic Research)vno. w15003.4 uhttp://www.nber.org/papers/w1500341uhttp://dx.doi.org/10.3386/w15003